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Hong Kong protests and their implications for business in Greater China

For many, the magnitude and impact of the protests in Hong Kong are difficult to understand. Some may see the protests as an extension of the 1989 Tiananmen uprising and a general revolt against an oppressive one-party regime. Others may see a movement that looks similar to Occupy Wall Street, with streets filled with young idealistic activists. While certainly there are some similarities to these historical protests, the truth is a bit more nuanced. To start, an understanding of Hong Kong’s historical significance is necessary.

Hong Kong’s Historical Significance

Hong Kong as a gateway for unwanted change

Even prior to the United Kingdom handover of Hong Kong to China in 1997, Hong Kong has long been a region of experimentation. From the mid-1700s, the greater Guangzhou region (the area surrounding Hong Kong, also known as Canton) was the only point of trade and contact with the Western world under the Canton System. This system was meant to not only limit the perceived commercial threat posed by foreigners, but also to limit a perceived political threat from abroad as well. Following the First Opium War, the UK seized Hong Kong as part of the Treaty of Nanking in 1842, forcefully opening more points of free trade. One of the goals of this war was to rectify a trade balance, wherein the West was purchasing large amounts of Chinese goods but were limited from selling products to the Chinese mainland. What resulted however, was the forced trade of opium into China. This was the first of many unequal treaties, in which China was subjected to the whims of the Western powers during what Chinese historian’s describe as the “Century of National Humiliation.” After a Second Opium War and years of forced opium trade, 27% of China’s male adult population regularly used opium by 1906. From a historical perspective, Hong Kong and the greater Guangzhou region represented an entry point for physical poisons.

Hong Kong as a gateway for controlled experimentation

Since the United Kingdom handed Hong Kong back to China in 1997, Hong Kong has existed as a Special Administrative Region (SAR), with a different set of rules and regulations than the rest of the Mainland. Under this system, Hong Kong was granted a high degree of autonomy with a separate political system and economy described by Deng Xiaoping as “One country, two systems.” In particular, Hong Kong maintained its own currency, economy, and most importantly, government. The establishment of neighboring Shenzhen as a Special Economic Zone served as an experiment for market capitalism under the system of “socialism with Chinese characteristics.” The investment of large international firms like Foxconn, resulted in large economic successes that drove the rapid acceptance of market capitalism throughout the rest of China.

As a result of Hong Kong’s history, there is a subtle but important cultural gap between Hong Kong and the Mainland. Rightly or wrongly, many Hong Kong citizens see themselves as superior to Mainlanders. Nevertheless, China has continued to allow Hong Kong special privileges not afforded to the rest of China in maintaining Hong Kong as a place for economic experimentation. Given its special status in China, changes in Hong Kong have major implications on business in Greater China

Implications for Business in Greater China

Given this historical perspective on Hong Kong, there are a few key questions that businesspeople need to examine in the wake of these protests:

Will China allow Hong Kong’s historical role as a gateway into China extend beyond an experiment in economics into an experiment in politics?

What started these protests was that Beijing proposed a change that would limit the existing democratic election process, by effectively limiting the chief executive candidates to those handpicked by the mainland government. Thus, the results of these protests have very specific implications for the future of democracy in Hong Kong, and by proxy democracy in China. Although democracy in China is unlikely at this point, any steps towards or away from democracy in Hong Kong will likely effect the political discourse in greater China.As any who have worked in China know, it is very necessary to have relationships or guanxi (關係) in order to do business there. As market capitalism has spread through China from Hong Kong, business reform has also spread. Thus, the political discourse in China will likely have a long-term impact on the way business in China is done.

Will these protests lead to more severe unrest in Hong Kong and Greater China?

This is a key question with the potential for more severe short-term financial implications. Since the start of the protests, the Hang Seng Index has already plummeted over 6.4% as investors pull money out of Hong Kong. Certainly, these investors are afraid that extended unrest in Hong Kong will negatively impact business potential in Hong Kong.In addition to the effect of unrest on Hong Kong, one must also consider the impact of unrest in Hong Kong on greater China. Instagram has been blocked in China since Sunday, and other social media and search sites are being actively censored by the government. If the unrest contagion spreads to greater China, it is likely that the PRC will clamp down in a much more extreme manner, but this is dangerous territory. Images of protestors being met by police armed with tear gas and riot shields are likely to evoke memories of Tiananmen, even in China where this event is actively censored. China must tread very lightly, as a violent clampdown of prospects in Hong Kong would likely crush the future of Hong Kong as an international business center.

How will this impact cross-strait relations and the prospect of Taiwan joining greater China?

China has extended to Taiwan the offer of rejoining China as a special administrative region similar to Hong Kong. Given Taiwan’s status as one of the “Four Asian Tigers,” this certainly has large implications for business, especially for the information technology and high tech manufacturing industries. Since the election of Ma Ying-Jeou (馬英九) as president of Taiwan in 2008, cross-strait relations between China and Taiwan have improved dramatically, resulting in substantial Taiwanese investment and emigration to China.In recent years, one of the simpler ways for foreigners to invest in Chinese growth was to invest in Taiwanese firms investing in China such as Foxconn. How things play out in Hong Kong will have a substantial impact on the future of cross-strait relations and continued Taiwanese investment in China.

The PRC has a very delicate task ahead in figuring out how to address these protests. Extended protests and backing away from previous moves will certainly cause the PRC to “lose face,” but violent clampdowns would have very dramatic repercussions. For businesspeople, it is important to understand that these events could radically change the future prospects of doing business in greater China and Asia Pacific.

Nathan Guo is a chemical engineer and MBA with experience scaling businesses around the world in China, Germany, and Jordan. He has experience in private equity consulting, venture capital, and web development, and also played poker professionally in the past.